Pass the adjustment entry for the following scenario:
The capitals of A, B, and C stood at ₹20,000, ₹15,000, and ₹10,000 respectively after the necessary adjustments in respect of drawings and net profit. Subsequently, it was discovered that interest on capital (IOC) at 10% per annum for ₹20,000, ₹15,000, and ₹10,000 respectively have been ignored.
Profit of the year already adjusted was ₹10,000.
Drawings of the partners were ₹1,000, ₹800, and ₹500 respectively. They share profits and losses in the ratio 2:1:1.
Answer (1)
To address this question, we need to make appropriate adjustment entries for the interest on capital (IOC) which was omitted. Here's a step-by-step guide to how you can proceed:
Calculate the Interest on Capital (IOC) :
Since the rate of IOC is 10% per annum, the interest for each partner would be:
Partner A: 20 , 000 × 100 10 = 2 , 000
Partner B: 15 , 000 × 100 10 = 1 , 500
Partner C: 10 , 000 × 100 10 = 1 , 000
Total Interest on Capital is calculated as:
2 , 000 + 1 , 500 + 1 , 000 = 4 , 500
Adjusting Profit :
The profit before any adjustment was given as ₹10,000. The interest on capital of ₹4,500 needs to be allocated out of this profit:
New Adjusted Profit = 10 , 000 − 4 , 500 = 5 , 500
Profit Distribution :
The profit-sharing ratio is 2:1:1. Using the adjusted profit of ₹5,500, the shares will be:
Partner A: 4 2 × 5 , 500 = 2 , 750
Partner B: 4 1 × 5 , 500 = 1 , 375
Partner C: 4 1 × 5 , 500 = 1 , 375
Adjustment Entries :
The adjustment entry for recording the interest on capital and adjusting the profit is:
Debit: Profit and Loss Appropriation Account ₹4,500
Credit: Partner A’s Capital Account ₹2,000
Credit: Partner B’s Capital Account ₹1,500
Credit: Partner C’s Capital Account ₹1,000
This entry records the interest on capital which was previously omitted.
By following these steps, the financial records will accurately reflect the interest earned by the partners on their capital.
